Keep up With the Rules

Four years ago, Congress unexpectedly raised the individual lifetime exclusion for estate and gift tax from $3.5 million to $5 million, effective for 2011 and 2012. Due to the concern that the exclusion would go back to $1,000,000 for 2013, the increase resulted in a great rush to complete gifting by the end of 2012. Ultimately, Congress left the increase in place. With all of the excitement generated by this change, it may have been overlooked that Congress made another major change: the lifetime exclusion will be indexed for inflation.

Therefore, the individual lifetime exclusion for estate and gift tax has increased every year, from $5,000,000 in 2011 to $5,120,000 for 2012; $5,250,000 for 2013; and is currently $5,340,000 for 2014. Therefore, if a married couple in 2012 utilized their entire lifetime exclusion of $10,240,000 ($5,120,000 x 2) through gifting of assets to their beneficiaries, in 2014 they would have an additional $440,000 ($220,000 each) of lifetime exclusion to be able to gift to their beneficiaries, gift tax free in 2014 due to the increase in the exclusion as a result of the inflation adjustment.

Additionally, the “annual exclusion” for gifting purposes is $14,000 for 2013 and 2014. This is the amount that each person can gift annually to any number of beneficiaries without generating the requirement of a gift tax return. Gifts up to this amount will not reduce the lifetime exclusion as well.

This is a very brief discussion of the general changes in the lifetime exclusion and annual gift exclusion. There are many factors and circumstances that need to be considered before making a gift and we are happy to help you determine the best plan for your gifting desires.